No SEA unicorns? Blame investors

• Asian investors are still stuck in the old economy mindset of revenues and profits
• Many unaware that market share and dominant positions can create huge value

FOR the uninitiated, a ‘unicorn’ in technology and venture capitalist jargon is a company valued at US$1 billion or more. As you would expect, this is a rare occurrence in Asia excluding China. Even India, with its vast market and huge potential, has very few unicorns.
 
The Wall Street Journal actually keeps track of unicorns. Currently, there are 150 unicorns on its list, the majority of which are American and Chinese, with a few European and Indian companies.
 
Malaysia has only one unicorn: Grab (formerly GrabTaxi), valued at USS1.6 billion. (For readers outside Malaysia, Grab was started in Kuala Lumpur by Malaysian Anthony Tan, but has its current headquarters in Singapore because most of its funding is from funds based in the Lion City).
 
So why are unicorns a rarity in this part of the world? Surely we have good entrepreneurs in South-East Asia? It cannot be due to a lack of entrepreneurs.
 
Perhaps it’s because we have a small market? That does play a role because China, India and the United States are not just huge markets, but fairly homogeneous ones with a singular language and culture.
 
But if so, how then do we explain a company like Grab that has successfully entered several South-East Asian markets, and in the process became a unicorn?
 
Of course, the ride-hailing startup also managed to raise US$890 million, so perhaps the ability to raise large amounts of funds helps. The WSJ list shows that all unicorns have raised huge sums of money, with Uber the biggest fundraiser at US$12.9 billion.
 
But it’s not just the ability to raise funds, but why they have managed to raise so much money. All the unicorns have one common factor: They are companies that control large market shares in their respective industries.
 
Whether it is a Uber, Airbnb, Flipkart (India), Go-Jek (Indonesia) or Grab, their investors pump in money because these companies have proven their ability to grow their market share and become dominant players in those markets.
 
Another common factor: They also lose a lot of money, as none of them are profitable. Yet they have huge valuations. This is a concept that is alien to Asian investors. How can a company that loses tons of money have such huge valuations?
 
In short: Market share baby, market share!
 

 
This concept of grabbing market share first is nothing new. The largest tech companies in the world started by building huge market share and creating dominant positions before becoming profitable.
 
Facebook, Google, Amazon and Tesla took almost a decade to turn a profit. Amazon continued to lose money even after almost 20 years, as Jeff Bezos’ driving ambition was to become the world’s largest online retailer by market share.
 
Today Amazon is profitable and it has even discovered a new source of profits, Amazon Web Services, which rents out server space to other companies. Tesla only turned a profit a decade after Elon Musk invested in the company.
 
Some companies don’t even have revenue and yet are unicorns. WhatsApp and Waze come to mind. What do they have? You guessed it, market share. Waze had 50 million users and WhatsApp had 430 million when they were acquired for US$1 billion and US$19 billion by Google and Facebook respectively.
 
This concept that market share and dominant positions can create huge value still has not taken hold in Asia. Asian investors are still stuck in the old economy mindset of revenues and profits.
 
Don’t get me wrong, I am not saying that revenues and profits don’t matter – they do, but you can’t make huge revenues or profits if you don’t have dominant market positions in the first place.
 
So unlike like the conundrum of which came first, the chicken or the egg, in the tech world, market share comes first before revenue and profits.
 
Based on an understanding of the most successful tech companies, creating a unicorn is a three-step process:
 

• Step 1: Create product/ market fit (PMF), that is, build a product that users and customers love and use.

• Step 2: Once you have PMF, grab market share as fast and as extensively as possible. Be the dominant player in your market regionally or globally.

• Step 3: Once you have huge market share, then you monetise your product. It is easier to monetise when you are the dominant player than when you are a small company, because everyone wants to do business with the dominant player.

If you are lucky, you may be acquired for billions of dollars even before you monetise, like Waze or WhatsApp, but don’t worry about luck. Once you are dominant, you won’t need luck.
 
This concept of building market share and not revenues is unfortunately alien to most Asian investors, both venture capitalists (VCs) and angel investors.
 
Almost all of them will insist that the company focus on revenue, and often during the fund-raising process, they are more interested in revenue and profits instead of market share.
 
I know this because I am helping several companies raise funding, and the questions are inevitably about how much revenue you have and when you will be profitable.
 
The right questions to ask should be how you will create a dominant position and build market – and how much you need to do this.
 
However, this requires a major change in mindset among investors, and that is the biggest challenge for entrepreneurs. I know of so many companies that have great products and which are looking for money to grow, but are disappointed every time because investors are more interested in immediate revenue and profits.
 
Worse still, many investors force this thinking onto entrepreneurs via clawback clauses based on revenue targets. So if the entrepreneur does not hit the revenue targets, the investor gets a bigger stake.
 
This sort of thinking will not help us create more unicorns. In fact, setting revenue generation targets on entrepreneurs before building market share is a ‘unicorn killer.’ By forcing the entrepreneur to change focus to revenue and profit, he would be unable to drive market share, and with that, the unicorn dream ends.
 

 
I am sure many entrepreneurs who have raised funding will attest to this.
 
So if we want to create more unicorns in Asia, investors need to change the way they think and invest.
 
You certainly cannot create a unicorn without raising funds, and that has been proven by the 150 unicorns on the WSJ list.
 
But you also cannot create unicorns unless you understand that there is a process that has to be followed: Product/market fit, market share, and then only revenue and profits.
 
If investors try to shortcut this process by jumping from product/market fit to revenue/ profits without creating a dominant market share or position, then forget about creating unicorns.
 
Now we know how unicorns are created. Is any investor game to try? I have a few companies that fit the bill perfectly.
 
Dr V. Sivapalan is an angel investor and president of the Malaysian Business Angel Network, as well as chief evangelist and author of ‘Blue Sky Innovation,’ a book on business innovations available at Amazon’s Kindle store.
 
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Angels with pitchforks, VCs who don't venture
 
 
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